b. Scenario 2 InfoTech Ltd, an IT company based in Muscat, wants to set up an employee benefit reserve fund. The purpose of this fund is to help the company make payments for the medical, dental and other costs incurred by its employees. The company need to setup a fund so that it can use an amount of RO 5000 yearly for the next 10 years for this purpose. The company has two options to set up this fund. Option 1 The company can make a single payment of a lump sum amount in a bank which would fetch an interest rate of 14% annually. This deposit would grow over the years and the required amount of RO 5000 could be taken from this fund every year for the next 10 years. Option 2 The company could deposit an amount of RO 1100 at the end of first year in bank and increment the deposit by RO 500 each year for the next 9 years. If the bank gives an interest of 14% every year on its deposits this fund will be sufficient to meet the employee welfare expenses. Which of these two options would be better for the company if the company considers the cash flows in terms of its Future Worth? Justify your answer with proper explanations.

b. Scenario 2 InfoTech Ltd, an IT company based in Muscat, wants to set up an employee benefit reserve fund. The purpose of this fund is to help the company make payments for the medical, dental and other costs incurred by its employees. The company need to setup a fund so that it can use an amount of RO 5000 yearly for the next 10 years for this purpose. The company has two options to set up this fund. Option 1 The company can make a single payment of a lump sum amount in a bank which would fetch an interest rate of 14% annually. This deposit would grow over the years and the required amount of RO 5000 could be taken from this fund every year for the next 10 years. Option 2 The company could deposit an amount of RO 1100 at the end of first year in bank and increment the deposit by RO 500 each year for the next 9 years. If the bank gives an interest of 14% every year on its deposits this fund will be sufficient to meet the employee welfare expenses. Which of these two options would be better for the company if the company considers the cash flows in terms of its Future Worth? Justify your answer with proper explanations.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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